Laura D. Tyson: Successes and Challenges of Californian Capitalism

As a member of Future of Capitalism Project the Council on Foreign Relations (CFR), Roger W. Ferguson Jr. invites a wide range of thought leaders from academia, the private sector and government to contribute to a series of blog posts to provide perspectives on the different types of capitalism in practice around the world, the challenges these systems are facing and their future in the twenty-first century. This post comes from Laura D. Tyson, former chair of the Council of Economic Advisers under President Bill Clinton. Dr. Tyson is currently Professor Emeritus of the Haas School of Business graduate school at the University of California, Berkeley. She is Governor Newsom’s co-chairCalifornia Council of Economic Advisors.

California has one of the largest, most diverse and innovative economies in the world. Its economy is based on capitalist principles and institutions: private property, markets and democracy. But the state has built its own distinctive model of “California capitalism,” using the powers granted to it by the 10th Amendment to the US Constitution to foster more sustainable and inclusive prosperity. Its greatest successes are in education, health and the climate. Its biggest challenges are inequality and affordable housing.

Safer:

United States

State and local governments (United States)

Education

Health

Climate change

California is a leader in world-class public universities, state and community colleges, and cutting-edge research centers. The state’s community college system is the largest in the nation, accounting for about a quarter of all U.S. community college students. Community colleges are and will remain the largest source of career training in the United States, conferring substantial salary and employment benefits on those who complete a two-year degree. California’s public university system is the largest research university system in the country, with the largest share of Pell scholarship students in the country.

California outperforms the United States overall in health care with the smallest percentage of uninsured people, the highest percentage of Medicaid, longer life expectancies, and lower infant mortality rates. California will expand health coverage to all low-income earners, regardless of immigration status, by 2024. Foreign-born people make up more than 27% of California’s population, double the percentage from the rest of the county. About 22% of California’s 11 million immigrants are undocumented and they account for about 6% of employment.

California is a leader in reproductive rights and abortion, acting as a sanctuary state for those who live in states that ban abortion. California is investing more in reproductive health facilities and training the workforce needed to meet the increased demand. The state also passed a law protecting out-of-state patients who come to California for an abortion from lawsuits in other states. California voters are likely to approve an amendment establishing the right to abortion in the state constitution in November.

California continues to lead the country in environmental and climate policy. The state is deploying a variety of tools to achieve carbon neutrality by 2045. These include the state’s cap and trade system, clean energy targets and incentives, and capture carbon emissions, heavy investment in electric vehicle charging stations, and bold regulations that will ban the sale of new carbon cars in the state by 2035. Given that California is the largest sales market of automobiles in the United States and several major states are following California’s lead on auto emissions, California’s new regulations will accelerate the transition to electric vehicles.

Inequality and poverty remain major challenges for Californian capitalism. California has the fourth highest Gini coefficient in the country, higher than the national average. The California tax system is progressive, with about 90% of taxes coming from 10% of the population and 40% from the top 0.5%. The state has the highest personal income tax rate in the nation and taxes capital gains as ordinary income, which is one of the main reasons the state ran a record surplus in 2021.

Safer:

United States

State and local governments (United States)

Education

Health

Climate change

About 12% of California’s population lives in poverty, about the same as the national average, but lower than that of Texas, a state with which California is often compared. Based on the cost of living, California’s poverty rate is among the highest in the country. This is despite numerous generous programs to help those living in or near poverty, including a state Earned Income Tax Credit (EITC), state child credit, CalWorks, a public assistance program providing money and services to eligible families, and a state minimum wage of $15 indexed to inflation. The state has also passed new legislation significantly expanding unpaid family leave entitlements. Employers with as few as five employees must now offer this option as well as more time for paid sick leave to workers forced to self-isolate or quarantine following an exposure or diagnosis of COVID. The state also funded the California Rebuilding Fund, an innovative public-private partnership that provides loans and counseling to small businesses, with a focus on underserved communities.

Affordable housing remains a major challenge for Californian capitalism; indeed, the lack of affordable housing is both a major reason why California is losing middle- and low-income citizens to other states, and a factor behind the rising number of homeless. -shelter in California. The state is short of one to two million units due to both rapid population growth and decades-long underinvestment in housing, largely the result of restrictive building regulations , often local, and NIMBY opposition, especially among wealthy residents. The state has imposed quotas on local governments to zone more land for residential construction, but they are resisting pressure and taking their cases to court.

Despite its challenges, California remains a beacon of progressive federalism and a laboratory of democracy in the United States.